Thursday, April 12, 2012

When Andy Dunn helped start Bonobos five years ago, he wanted to shake up the retail industry with a men’s wear brand exclusively sold online.

Now Mr. Dunn, 33, is embracing the brick-and-mortar model, striking a partnership with Nordstrom, the 111-year-old department store.

It is a symbiotic deal. Bonobos will get $16.4 million in cash and more than 100 stores to sell its clothes, while Nordstrom will get gain expertise on e-mail marketing and online branding.

“We’ve been thinking about where growth is going to come from across all retail over the next 10 years,” said Jamie F. Nordstrom, the head of Nordstrom.com and the great-grandson of the company’s founder. “And certainly square-footage growth is not where that growth is coming from.”

As consumers grow increasingly comfortable online, pricewise and technology-focused, established brick-and-mortar players and fledgling e-commerce sites are finding they need each other.

With sales under pressure, traditional retailers, which have struggled to establish a unique online identity, are trying to tap into the innovative, fast-paced start-up mentality. At the other end of the spectrum, young Internet companies, facing fierce competition and the limits of their growth, are warming to deals with industry giants that have substantial resources and significant distribution outlets.

In March 2011, the pharmacy chain Walgreen acquired its online rival Drugstore.com for roughly $409 million. One month later, Wal-Mart Stores paid about $300 million for Kosmix, a social media start-up that now serves as the retailer’s lab for building and testing new Web and mobile applications. Wal-Mart, the world’s largest retailer, also owns a controlling stake in Yihaodian, a fast-rising online retailer in China.

“These guys are usually slow and lumbering giants,” said Sucharita Mulpuru, a Forrester Research analyst. “But they need to make proactive investments. Because, left to their own devices, they could never emulate these businesses.”

Nordstrom has been among the most aggressive retailers online. Last February, it acquired HauteLook, for $180 million in stock; the takeover of the “flash sales” site was the first of its kind for a traditional retailer. Nordstrom is also a lead investor in Sole Society, a shoe subscription service that was spun out of HauteLook.

The retailer is also retooling its own site to compete with upstarts. Nordstrom.com has introduced same-day shipping in certain markets and it has applications for Apple’s iPad and iPhone devices. Last year, Nordstrom put more than 6,000 mobile hand-held devices in its stores for easy checkout and inventory lookup.

Internally, the company plans to spend $140 million on e-commerce this year, a 40 percent increase from the previous year. Over the next five years, it intends to devote almost $1 billion, or roughly 30 percent of its capital expenditures, on fueling e-commerce growth.

But the transition to the Web has not been easy for retail’s giants.

Like many of its peers, Nordstrom’s online strategy floundered out of the gate. At the tail end of the last Internet boom in 1999, the company started its online store, with the help of venture capital partners like Benchmark Capital. The merchandise and pricing on the initial version of the site differed from that in Nordstrom’s regular stores and confused customers, according to Mr. Nordstrom.

Over the next few years, Nordstrom worked on reconfiguring its site to create a seamless shopping experience for consumers, standardizing its prices and introducing in-store pickup. A little more than a year ago, the Nordstrom family stepped up its efforts. Instead of merely blending in-store and online shopping, Mr. Nordstrom began scouring the Web for innovative ideas.

“Now we’re more focused on what would it take to operate a best-in-class experience online,” Mr. Nordstrom said. “That requires you to think about investments and your digital business differently.”

Nordstrom, which has a large, carefully curated men’s store, was initially interested in a simple distribution deal with Bonobos, a brand popular with well-to-do young professionals who fancy crisp plaid shirts and red chambray pants. But the retailer developed a deeper interest after taking a closer look at Bonobos’s operations and how it engaged with its online audience. Mr. Nordstrom was particularly impressed with Bonobos’s e-mails to consumers, which included customized elements and links to quirky You Tube videos that weren’t related to fashion but appealed to Bonobos’s male clientele.

“We certainly thought: there’s a way we can help them and they can help us,” Mr. Nordstrom said.

For a big retailer like Nordstrom, such e-commerce bets don’t have all that much impact on the bottom line. In late 2010, Bonobos was averaging a little more than $1 million in sales each month. By comparison, Nordstrom recorded net sales of more than $10 billion last year.

Instead, retailers see the ventures as an opportunity to improve their practices, using their online partners as laboratories where they can develop new e-commerce strategies. Kosmix, renamed WalmartLabs, is an experimental factory for social media applications. Since joining Wal-Mart last April, the team has introduced a mobile app for gift-giving, improved the company’s online search function, and started a Web competition called “Get on the Shelf,” where small businesses compete to sell their products in Walmart stores.

Nordstrom’s online effort has already been influenced by its purchases. In the last year, the company has improved the personalization and targeting of e-mails to consumers, mirroring efforts by HauteLook. Such tweaks have increased engagement “pretty significantly,” according to Mr. Nordstrom. The executives at HauteLook, along with the team at Bonobos, will also help the company design new applications for mobile devices and Nordstrom.com.

The new relationship could be equally advantageous to Bonobos, which is dealing with rising competition online.

In its early years, the business grew fast, largely supported by word-of-mouth marketing. But as Bonobos got bigger, the start-up began to spend more money on advertisements to attract new customers. By 2011, the company was devoting about 20 percent of its revenue to marketing, about double the previous year.

The hope is that the Nordstrom partnership will expose Bonobos to new clients, particularly those who may not be shopping online. Although Nordstrom may cannibalize some of Bonobos’s existing sales, Mr. Dunn, the company’s chief executive, said any loss in direct sales would be offset by the marketing benefits.

“It was foolish to contain this brand in one channel,” he said. “For so long we were operating like we were so different from store-driven retailers, but we are more similar.”

This post has been revised to reflect the following correction:

Correction: April 12, 2012

Because of an editing error, an earlier version of this article misstated Brian Spaly's role at Bonobos. He and Andy Dunn founded the company and used to be business partners. They are no longer business partners.